Posted by The Piagi Shoutout on Fri, May 18, 2012 @ 07:54 AM
The European Commission and the European Central Bank are drawing up plans in case Greece abandons the euro, Trade Commissioner Karel De Gucht said in an interview published Friday, the first time a senior official within the EU executive has acknowledged such preparations.
A commission spokeswoman denied that contingency plans for a Greek exit were under way.
Such plans have long been speculated, but they remain a taboo subject in Brussels, where EU officials have long said a Greek withdrawal is out of the question. Similarly, they avoided talking about a Greek restructuring in the early days of the country's debt crisis. The country recently completed the biggest debt writedown in history.
In an interview with the Flemish newspaper De Standaard, De Gucht said the European Central Bank and the commission were "working on emergency scenarios in case Greece does not make it."
He refused to discuss details, but said Greeks should not assume the European Union will bend on the country's bailout if anti-austerity parties prevail in elections next month.
There was "no margin" left to offer Greece any concessions, De Gucht said.
Earlier this week, some EU finance ministers signalled there might be limited scope to relax some of the tough fiscal targets set by the ECB, the commission and the International Monetary Fund in return for financial assistance.
Commission spokeswoman Pia Ahrenkilde-Hansenthe dismissed De Gucht's comments. "This is not a scenario that we are working on," she said in response to questions from reporters.
Many experts say a Greek exit from the euro zone would spell the demise of the currency bloc.
But the EU trade chief played down the risk that other countries would pull out.
"The chaos in Greece would be so great, that other citizens will realize they don't want to leave. I am sure of that."
He said it was imperative that Greece to follow through on its economic overhaul and remain within the 17-nation currency union.
"There is no alternative. Greece must stick to the deals that have been agreed. That's the only rational option for the country," he said, according to the paper.
"Ultimately, I think Greece will stay in the monetary union," De Gucht said.
Yet he did not rule out a third round of elections or a referendum on euro-zone membership in which the Greeks would "perhaps vote differently."
Posted by The Piagi Shoutout on Fri, May 18, 2012 @ 07:42 AM
Rates Page 18.05.2012
Piagi reports today after the euro sank to a four-month low against the dollar, heading for its biggest weekly drop since January, after Moody’s Investors Service downgraded 16 Spanish banks, underscoring concern that Europe’s turmoil is worsening.
The 17-nation currency declined to the weakest in three months versus the yen and headed for a fourth weekly decline against Japan’s currency after Fitch Ratings downgraded Greece’s long-term credit rating, citing heightened risk that the nation will exit the monetary union. The dollar and the yen advanced against most of their major peers as demand for the safest assets increased. The Australian and New Zealand dollars declined for a sixth day.
“Greece is in trouble and that is pushing the euro lower,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “The real issue is contagion to Spain. The markets can probably start to stabilize sometime soon, there is a lot of bad news priced in and we are near a lot of key technical levels in euro-dollar.”
The euro reached $1.2642, the weakest since Jan. 16, before trading 0.2 percent lower at $1.2671 at 9:10 a.m. London time. Europe’s shared currency slid 0.1 percent to 100.55 yen after earlier touching 100.21, the lowest since Feb. 6. The dollar was little changed at 79.31 yen from 79.28 yesterday, when it dropped to 79.14, the weakest since Feb. 17.
The euro has fallen 1.9 percent against the greenback since May 11, a third weekly loss that’s the longest stretch since Jan. 13. It has lost 2.6 percent versus the yen for a fourth weekly slide.
Credit Ratings
The Australian dollar slid 0.6 percent to 98.34 U.S. cents, poised for a 1.8 percent drop this week. New Zealand’s dollar headed for 3.4 percent decline since May 11, and retreated 0.9 percent to 75.63 U.S. cents from yesterday.
Moody’s Investors Service lowered the credit ratings of 16 Spanish banks yesterday, including Banco Santander SA (SAN), citing economic weakness and the government’s mounting budget strain. The reductions followed Moody’s May 14 rating downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt.
Greece’s lower rating came as leaders began campaigning ahead of the second national vote in six weeks.
“The strong showing of ‘anti-austerity’ parties in the May 6 parliamentary elections and subsequent failure to form a government underscores the lack of public and political support” for the country’s bailout from the European Union and International Monetary Fund, Fitch said in a statement yesterday.
Market ‘Concerned’
The Stoxx Europe 600 Index dropped 0.8 percent, extending its weekly decline to 4.8 percent.
“The market’s very concerned about contagion and Spain probably being the biggest focus of attention after Greece,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. “If the euro breaks $1.26, there’s probably not a lot of stops going to the lows that we saw in 2010.”
The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, climbed 0.1 percent to 81.592, its 15th day of gains, the longest winning streak since its inception in 1973.
The index’s “rally phase” is here to stay, according to Niall O’Connor, a technical analyst at JPMorgan Chase & Co. in New York.
“There is still little evidence of a reversal,” O’Connor wrote in a note to clients today.
Philly Fed
The index must fall below the key support level of 80-80.33 to reassert the short-term downward bias, he wrote. Support refers to an area on a price graph where there may be an accumulation of orders to buy.
A report from the Federal Reserve Bank of Philadelphia yesterday showed the general economic index fell to minus 5.8 this month, the lowest reading since September, from 8.5 in the previous month. Economists surveyed by a News service forecast an increase to 10. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.
“The global market remains nervous,” said Kikuko Takeda, a London-based senior currency economist at Bank of Tokyo Mitsubishi UFJ Ltd. “We can’t buy the euro, and if the U.S. economic outlook is uncertain, yen will be bought.”
The euro has lost 5.4 percent in the past year, the second- worst performance among the 10 developed-nation currencies tracked by a Correlation-Weighted Indexes. The yen is the biggest gainer, having advanced 9.2 percent, while the dollar has strengthened 7.3 percent.
Japan’s Finance Minister Jun Azumi said today he is watching currency moves with great interest and more caution. Azumi said Japan will take appropriate steps if needed in the foreign-exchange market.
Posted by The Piagi Shoutout on Thu, May 17, 2012 @ 06:59 AM
Rates Page 17.05.2012
Piagi reports today as the U.K. Prime Minister David Cameron plans to say that he won’t swerve from his austerity plan, warning members of the European single currency that failure to resolve their problems carry “huge risks for everybody.”
Euro countries are “at a crossroads” and must either “make up” or “break up,” according to comments prepared for a speech today. Bank of England Governor Mervyn King said yesterday officials have prepared for dangers posed by Europe’s debt crisis, after the bank lowered growth forecasts and raised predictions for inflation this year.
Britain’s opposition Labour Party has renewed calls for Cameron to ease his deficit reduction plans, pointing to the election of French President Francois Hollande as a sign that Europe is starting to take a different course. The prime minister will reject that argument, according to the comments.
“We are living in perilous economic times,” Cameron will say today, according to speech extracts released by his office. “We cannot blow the budget on more spending and more debt. It would squander all the progress we’ve made in these last two, tough years. It would mean more austerity, for even longer. It would risk our future.”
Cameron will have his first meeting with the French President in Washington tomorrow, before the Group of Eight summit at Camp David. Hollande has already met German Chancellor Angela Merkel.
Greece is heading for new elections after a political stalemate that’s sent stocks lower, pushed up bond yields and raised concern the nation may leave the euro area.
“Either Europe has a committed, stable, successful euro zone with an effective firewall, well capitalized and regulated banks, a system of fiscal burden sharing, and supportive monetary policy, or we are in unchartered territory which carries huge risks for everybody,” Cameron plans to say. “Whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system.”
Posted by The Piagi Shoutout on Wed, May 16, 2012 @ 08:06 AM
Rates page 16.05.2012
Piagi reports today as the Great British Pound Slides Most in a Month Versus Dollar on Growth Concern
The pound weakened the most in a month against the dollar and gilt yields dropped to records after the Bank of England said U.K. economic growth was likely to remain “subdued” in the near term.
Sterling weakened versus 13 of its 16 major counterparts as central bank Governor Mervyn King said the U.K. faced threats from the euro region’s “storm” as he released the quarterly Inflation Report in London. The central bank this month halted its bond-purchase, or quantitative easing, program at 325 billion pounds ($519 billion).
“The pound is lower given King’s concerns over the euro- zone fallout and the possible negative impact on the U.K. economy,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There were certainly no signs of further QE being off the table.”
The pound fell 0.4 percent to $1.5927 as of 11:45 a.m. London time after dropping as much as 0.7 percent, the biggest decline since April 13. It reached $1.5889, the lowest since April 17. Sterling slid 0.3 percent to 79.86 pence per euro.
“Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank funding costs and confidence,” the Bank of England said in the report. “The MPC judges it likely that the possibility of such extreme outcomes crystallizing will continue to weigh on U.K. activity for some time, even if those outcomes do not actually occur.”
Second Recession
The U.K. economy fell into its second recession since 2009 in the first quarter, the Office for National Statistics said on April 25.
The pound weakened 0.3 percent today, the worst performer among the 10 developed-nation currencies.
The 10-year gilt yield fell five basis points, or 0.05 percentage point, to 1.85 percent after dropping to a record 1.821 percent. The 4 percent bond due in March 2022 gained 0.45, or 4.50 pounds per 1,000-pound face amount, to 119.215.
The five-year yield dropped as much as seven basis points to a record 0.851 percent, while two-year yields slid to 0.342 percent, the lowest since Jan. 30.
Gilts have returned 0.2 percent this year, according to indexes compiled in the market and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 1.1 percent, and German bunds rose 2.6 percent.
Posted by The Piagi Shoutout on Wed, May 16, 2012 @ 07:44 AM
Piagi offers a Greek tragedy today as a Greek exit from the euro area has the potential to be the European Union’s most economically and politically destructive event of a generation. Unfortunately, Europe has reached the point where it must prepare for such an outcome.
Whether Greeks want it or not, circumstances could soon force their country to return to the drachma. Europe’s leaders, as Luxembourg Prime Minister Jean-Claude Juncker hinted, might extend Greece’s deadlines to meet the budget targets required for rescue money, but they won’t provide emergency financing to a government that refuses austerity measures. Without Europe’s help, Greece’s government (whoever ends up leading it) faces a dilemma: Cut spending even more than under the austerity program, or default on its debts and print a new currency to pay its bills.
A return to the drachma would be painful. The currency would immediately be worth a fraction of a euro, and would depreciate further if the government printed money to finance deficit spending. Bank depositors would get devalued drachmas, if they got anything at all. Businesses would be starved of credit. Prices and wages would probably rise to compensate for the currency’s loss of value, eroding the benefit of a cheap currency to Greek exporters.
Daunting Challenge
The rest of Europe would face the daunting challenge of containing the fallout. To that end, it must be prepared to do all the same fiscal reforms and take all the same emergency measures needed to keep the euro area intact, and more. Even then, a Greek exit would have unpredictable consequences.
First, Europe would have to absorb immediate losses on money lent to Greece. The country has about 400 billion euros in external debts, which its government, banks and companies would probably pay only in part or in drachmas. European taxpayers would suffer the lion’s share of the losses: Their exposure by way of the European Central Bank, national central banks and EU lending programs amounts to more than 300 billion euros. The rest would fall on private companies and banks, particularly in France, possibly requiring governments to step in and provide capital.
Second, European officials would need a plan to stop bank runs. As soon as Italian, Portuguese, Spanish and maybe even French depositors see footage of Greeks clamoring for their savings, they’ll want to get their euros out of local banks as quickly as possible. Bank holidays and bans on withdrawals would help only temporarily. To prevent a collapse of the banking system, Europe’s leaders would have to guarantee all deposits in euro-area banks, a move that would put Germany and other core countries on the hook for insuring more than 3 trillion euros in Italian and Spanish deposits. Common deposit insurance would also require euro-area governments to achieve in a matter of days a harmonization of banking regulation that has escaped them for more than a decade.
Third, Europe would have to calm market fears that other euro-area countries, such as Portugal and Spain, might follow Greece’s lead. Investors’ worries about such an outcome could become self-fulfilling if they pushed borrowing costs up to levels that the governments can’t bear -- a trend already evident in the yield on Spain’s 10-year bond, which stood at 6.3 percent Tuesday, up from less than 5 percent in early March. To keep interest rates down, the ECB could buy even more government bonds than it already has, or lend banks more money to do so. This could eventually leave the ECB holding or financing all the debt of the afflicted governments.
Market Confidence
Alternatively, the ECB could try to restore market confidence with a show of overwhelming force, guaranteeing the repayment of all struggling euro-area governments’ debts for the foreseeable future. But even this course of action, we have advocated as part of a plan to hold the euro together, might not have the desired healing effect after a Greek exit.
There would be political as well as economic costs. Greece is highly unlikely to leave the EU in a fit of nationalist pique -- it doesn’t want to face Turkey alone over Cyprus, or to see Balkan neighbors such as Albania, Macedonia and Serbia join the EU while it seethes outside. But for a European project that has been expanding and integrating ever more deeply since its formation as a six-nation coal and steel production union in 1951, a Greek exit from the euro -- especially if followed by other countries -- would mark a turning point. For example, if Greece can leave the euro, why not kick it out of the Schengen open-border zone? The majority of illegal immigrants to the EU come through Greece’s border with Turkey. It’s hard to predict what else might unravel.
Given the potential for unintended and unforeseen consequences, the least bad course for Greece and the EU remains, as Juncker hinted, for deadlines to be waived long enough for Greece to form a government that would recommit to a reform program. To make such an outcome possible, Europe’s leaders should move beyond self-defeating austerity and take immediate steps to support growth in Greece and other struggling countries. Failing that, Europe will have no choice but to prepare for the worst.
Posted by The Piagi Shoutout on Mon, May 14, 2012 @ 08:56 AM
Market Update - GBP EUR The Pound is continuing to trade close to three-and-a-half year highs against the Euro as the prospect of a Greek exit from the Eurozone becomes increasingly realistic. Sterling reached 1.2500 against the Euro last week following the Bank of England’s decision to leave quantitative easing on hold.
Political developments in Greece over the past week gave rise to a grim realisation within financial markets and the consensus is that a Greek exit from the Eurozone is now a question of when, rather than if. Although the large majority of Greek voters want to remain inside the currency bloc, they do not wish to adhere to the crippling austerity measures that accompany the €130 billion EU/IMF bailout package.
 |
| Sterling Euro |
With leaders unable to form a coalition government, a new election looms large in which Alexis Tsipras of the radical leftist SYRIZA party is the strong favourite to win. If elected, Tsipras has vowed to renege on Greece’s austerity agreement which has left the country’s position inside the Eurozone under serious threat. The severity of the situation is reflected in the language of European Central Bank policymaker Luc Coene: “I guess an amicable divorce – if that was ever needed – would be possible.” It is almost unheard of for senior ECB representatives to speak of a member exiting the Euro.
The news has caused European stock markets to plummet and the Euro has remained very weak in the currency exchange market. The single currency was not helped by a dismal set of European Commission forecast reports in which growth prospects for the majority of Eurozone governments were revised downwards. Sterling managed to sustain its exceptional recent gains as the Bank of England decided against any further boosts to its quantitative easing programme. The decision suggests a move towards a more relaxed stance from the Central Bank, although further stimulus is still a possibility as the UK economy remains subject to downside risks.
Over the coming week the Pound should continue to hold its excellent position against the Euro as political events unfold in Greece. Eurozone first quarter GDP results are expected to show that the currency bloc contracted further in the first three months of 2012 and the Euro is also likely to come under pressure from a drop in Consumer Price Index inflation. The only major concern for the Pound comes from the Bank of England’s quarterly Inflation report. If the statement shows that policy members are considering further stimulus as a matter of priority then Sterling’s positive momentum could be halted, but if the report follows analysts’ expectations by detailing a more relaxed approach from the Central Bank then the Pound to Euro exchange rate could possibly rise up even higher.
Posted by The Piagi Shoutout on Mon, May 14, 2012 @ 07:53 AM
Rates Page 14.05.2012
Piagi Reports today 14th May 2012 as The British pound has become currency traders’ favorite refuge from the resurgent European debt crisis, threatening efforts by U.K. Prime Minister David Cameron to lift the economy out of its second recession in three years.
Sterling has climbed a magnificent 3.4 percent this year, the most among 10 developed-market peers, data compiled by Bloomberg show. Strategists have boosted their year-end forecasts for the pound against the euro by 3.6 percent in 2012, while options show investors are becoming more positive on the pound versus its 17- member European counterpart.
Bulls say the pound’s 7.4 percent advance against the euro since October, even as the Bank of England flooded the financial system with sterling, is a sign the economy has bottomed. Bears say the gains may prove fleeting because the strong pound makes exports less competitive in the euro region, which buys about 47 percent of the U.K.’s overseas sales.
“The U.K. economic backdrop may not be brilliant, but it’s enjoying a haven status because of the political uncertainty in the euro zone,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a telephone interview on May 8. “The advantage of sterling over a traditional haven like the Swiss franc is that its asset market is more liquid. The downside is that the strength of the pound may backfire as it hurts exports.”
Franc Cap
Switzerland was the top choice for investors seeking safety from global financial and political turmoil, driving the franc to 1.00800 per euro in August from 1.68280 in 2007. The Swiss National Bank then said on Sept. 6 that it wouldn’t allow its currency to appreciate beyond 1.20 to the euro. Since then, the franc has traded between 1.24740 and 1.19900.
That leaves the pound, which accounted for twice the daily trading volume in the foreign-exchange market of the Swiss currency in 2010 based on Bank for International Settlements data, as the best alternative.
The pound strengthened 0.2 percent against the euro as of 11:38 a.m. in Tokyo to 80.22 pence as Greece struggled to form a government after inconclusive May 6 elections. Sterling fell 0.1 percent versus the dollar to $1.6058 as the Bank of England halted its quantitative-easing, or QE, program at 325 billion pounds ($522 billion) amid the threat of inflation.
Britain’s economy fell into its second recession since 2009 during the first quarter amid Cameron’s spending cuts, the deepest fiscal squeeze since World War II. The double-dip contraction is the first since 1975.
‘More Anxiety’
Growth will return over the full year, with the economy expanding 0.6 percent, according to the median of 24 economist estimates compiled by Bloomberg. The euro region will contract 0.3 percent in 2012, a separate survey shows, as recessions grip no fewer than five countries from Greece to the Netherlands.
“There has been a lot more anxiety about what’s been going on in Europe recently than there has in the U.K.,” Jeffrey Molitor, the chief investment officer for Europe at Vanguard Group, which has about $1.7 trillion of assets under management, said in an interview on May 8. “Britain is attractive because it has a relatively stable government, an intelligent workforce and an economy that can grow.”
The pound will end the year at 81 pence per euro, according to the median estimate of 42 analyst forecasts compiled by Bloomberg. On Dec. 31, analysts were forecasting sterling would depreciate during 2012, to 84 pence from 83.34 pence. The U.K. currency will end the year at $1.59, another survey shows, up from a prediction of $1.56. The pound has averaged 72.26 pence per euro since the common European currency was introduced in 1999, with the dollar averaging $1.2081 versus the euro in the period.
Forecasts Raised
Barclays Plc raised its three-month forecast for the pound on April 23 to 79 pence per euro from 84 pence, citing “sticky” inflation preventing the Bank of England from loosening monetary policy. Royal Bank of Canada strategist Elsa Lignos in London said sterling will strengthen to 77 pence by the second quarter of 2013, from a previous forecast of 79 pence.
“We expect the pound to be one of 2012’s outperformers, with an overall positive uptrend,” Lignos wrote in a May 10 investor report.
Cameron is sticking to the austerity program pledged when he came to the office two years ago, ending 13 years of Labour rule. He told the House of Commons on May 9 that deficit reduction is needed to keep interest rates low.
Cameron’s Cuts
His program includes at least 80 billion pounds of spending cuts to eliminate a deficit totaling 8 percent of gross domestic product by 2017. The reductions will result in 700,000 public sector job losses and lower spending on programs ranging from education to health care.
Standard & Poor’s affirmed Britain’s AAA rating and stable outlook on April 13, saying Cameron will maintain his focus on closing the budget gap.
U.K. output is about 4 percent below a pre-recession peak reached in 2008 and unemployment at 8.3 percent was close to a 16-year high in the three months through February, the Office for National Statistics reported on April 18, using International Labour Organization methods.
The economy grew 0.1 percent in the three months through April and will remain flat the next six months, the National Institute of Economic and Social Research said May 10 in London.
The Bank of England halted its so-called quantitative- easing program the same day amid rising inflation risks. Consumer-price growth has been above the government’s 2 percent target since December 2009. Policy makers kept their benchmark interest rate at a record low 0.5 percent.
‘Impressive Blip’
The boost the pound has received by putting QE on hold during the recession will probably prove short-lived because the economy remains weak, according to Paul Meggyesi, a managing director and currency strategist at JPMorgan Chase & Co. in London.
“It’s an impressive blip, but it’s still a blip,” Meggyesi said in a telephone interview on May 11. “I’m not sure the Bank of England has the luxury of sitting on the sideline watching while the economy continues to stagnate. The economic foundations, or the growth foundations, of sterling strength are not that compelling.”
An appreciating currency may impose additional hardships on U.K. companies.
Strong Pound ‘Problem’
“A stronger pound at a time when domestic demand is being affected by the austerity measures is a problem,” British Chambers of Commerce Chief Economist David Kern said in a May 11 phone interview. “It hasn’t reached dimensions yet that require immediate counteraction but it needs to be watched as it can cause a problem for exporters.”
Sensor Technology Ltd., a Banbury, Oxfordshire-based maker of torque sensors, which sells to companies including GlaxoSmithKline Plc, sends about 25 percent of its exports to Europe, said Tony Ingham, one of the three owners of the closely held company.
“If the exchange rate changes markedly then we obviously have to change the price that we sell at,” Ingham said in a May 11 telephone interview. “We will have to look very carefully at the euro rate,” even as the company hasn’t adjusted its prices yet, he said.
The pound is no Swiss franc in terms of national economic fundamentals. Britain’s gross public debt to GDP will rise about 6 percentage points this year to 88.4 percent, according to an International Monetary Fund forecast. Switzerland’s debt will be 49 percent, and its budget surplus will extend through next year, an IMF report on May 8 showed.
Political Impasse
The euro tumbled to a more than three-month low versus the dollar today as Greek political leaders struggled to form a government after inconclusive May 6 elections raised the possibility another vote will have to be held. The standoff reignited European concern over the nation holding to the terms of its two bailouts negotiated since May 2010, and sparked speculation about the country leaving the currency bloc.
Fifty-seven percent of investors said at least one country will abandon the euro by year-end, according to the Bloomberg Global Poll published May 10.
“Sovereign debt bloat and austerity resistance are undermining the euro,” said Clem Chambers, the chief executive officer of U.K. financial websites ADVFN.com. “It’s thus little wonder the currency has reached the low against the pound not seen for three and a half years.”
Risk Reversals
Francois Hollande, who defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy, has said he’ll push for less austerity and more growth in the region. Hollande has advocated more aggressive measures to spur economies, putting him at odds with German Chancellor Angela Merkel, who opposes adding to nations’ debt burdens.
The premium for three-month options granting the right to sell the euro against the pound relative to those allowing for purchases reached 1.67 percentage points on May 10, the most this year. It’s up from 0.59 percentage point in January, the 25-delta risk reversal rate shows.
“In an ugly bug ball, the pound is not quite as ugly as the rest of them,” said Alan Brown, a special advisor at Schroders Plc, which has $319 billion in assets under management. “The pound is one of our favorite currencies at the moment. That’s a tactical view, although it may probably last for a while.”
Posted by The Piagi Shoutout on Fri, May 11, 2012 @ 06:54 AM
Rates page 11.05.2012
Piagi reports today as the Pound Weakens amist a Drop in Consumer Confidence Boosts QE Outlook
The pound fell against the dollar, extending a second weekly decline, after an industry report showed U.K. consumer confidence dropped last month as the economy slipped into a double-dip recession.
Sterling slid for the first time in six days versus the euro as signs the economic outlook is worsening raised the prospect that Governor Mervyn King will hint at resuming bond purchases, or quantitative easing, when the central bank releases its Inflation Report next week. Gilts advanced before the Debt Management Office sells 2.5 billion pounds ($4.03 billion) of bills.
“The QE carrot is still dangling in front of the market should we get any more weak data,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “We’ve made a step-adjustment down in sterling being the pick of non-euro currencies to put money in.”
The pound dropped 0.2 percent to $1.6120 at 10:50 a.m. London time, headed for a weekly loss of 0.3 percent. It fell to $1.6067 on May 9, the lowest level since April 20. Sterling weakened 0.3 percent to 80.34 pence per euro, after rising to 79.97 pence, the strongest since November 2008.
Nationwide Building Society said its index of consumer sentiment dropped to 44 from 53 in March. A gauge of Britons’ outlook for the economy fell to 60 in April from 73 in March, the Swindon-based company said. A measure of whether it’s a good time to make a major purchase declined to 75 from 86.
The surveys were conducted before a government report on April 25 showed the U.K. economy shrank for a second quarter in the three months through March.
‘Not Off the Table’
The Monetary Policy Committee left its bond-purchase program at 325 billion pounds yesterday amid concern inflation is quickening. Unlike the last time it halted quantitative easing in February 2010, it didn’t issue a statement.
“The suspicion is that more QE may not have happened, but it’s not off the table by any stretch of the imagination,” Juckes said. “The economy is still weak. We’ll see more when we see the Inflation Report” on May 16.
Sterling has appreciated 4.8 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.2 percent, and the euro was little changed.
Gilts Gain
The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.95 percent, after falling to a record 1.881 percent on May 9. The 4 percent bond due March 2022 rose 0.32, or 3.20 pounds per 1,000-pound face amount, to 118.20.
Gilts have lost 0.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 0.6 percent and German bunds returned 2.2 percent, the indexes show.
King may leave the door open to add more stimulus as a flare-up in Europe’s debt crisis and government spending cuts threaten to keep Britain’s recovery at bay, according to economists at Deutsche Bank AG and BNP Paribas SA.
“They’ll have no choice but to revise down their growth projections” in the Inflation Report, said George Buckley, an economist at Deutsche Bank in London. “They have a dilemma of high inflation and very weak growth, but you definitely can’t rule more QE out.”
David Tinsley, an economist at BNP Paribas in London, said the Inflation Report will present a “fairly dovish assessment” of the economy.
Posted by The Piagi Shoutout on Thu, May 10, 2012 @ 06:36 AM
Rates Page 10.05.2012
Piagi Today looks at the property and political situations in Europe. Depending on your political persuasion, the news from Europe this weekend hasn’t been good.
The Greek political system is again in turmoil and the country looks unable to fulfill its promises. The new French president promises a top tax rate of 75% and will look to re-negotiate the austerity programme.
In Spain, the country’s third largest bank, Bankia, is in trouble and the government is about to u-turn on a commitment not to put public money into bailing out its banks.
Admitting that Bankia was in effect too big to fail Mariano Rajoy, Spain’s prime minister said yesterday:
“If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done”.
The Spanish press are reporting that a cash injection of €10 billion is close to being agreed. There are other options but a state bail out is the most likely outcome according to the FT.
So what does this mean for the industry?
One of the biggest problems is that although the Spanish Cajas must provision for bad property loans, the baseline for provisioning is from unrealistic real estate values. The banks are over-valuing property on their books which is hiding the true scale of the problem and distorting local property markets.
The impending bailout could be seen as the first step in the unravelling of this issue. The market cannot move on until banks are realistically pricing property. The government cannot publicly admit this is a problem for fear of creating panic in the financial system but it needs a plan to manage when and how quickly the Spanish banks reduce the prices of properties on their books.
If you thought prices were cheap now, you may be forced to revise your thinking in the not-to-distant future. The impending fire sale will create both distress and tremendous commercial opportunities.
The other question and the one European politicians refuse to speak of is the future of the Euro itself. If enough real estate debt is transferred from the Spanish banks to the state, Spain will need a bail out and there’s not enough money in the bail out fund to cope with a default from a country as large as Spain.
Posted by The Piagi Shoutout on Wed, May 09, 2012 @ 07:11 AM
Rates Page 09.05.2012
Piagi Reports how Greeks "flocked to anti-bailout parties" at the weekend. The exact nature of these gatherings was not detailed but it is fair to assume that the kleftiko and retsina enjoyed by revellers came from the Budget range.
What is certain is that most of the parties were small affairs, at least if Sunday's Greek election results are anything to go by. None of them achieved anything like a majority. The first crack at forming a coalition has already failed and subsequent efforts could well go the same way, leading to a new election. The French presidential race went according to the polls and François Hollande will step into Nicolas Sarkozy's tiny but brilliantly polished shoes.
Investors were not enamoured of either result, even though both were in line with expectations. As Far East markets opened on Monday morning the euro gapped lower, as did equity and commodity prices and the antipodean commodity dollars.
It was not a walkover for the bears though. Against the US dollar, the euro's low point was less than half a cent below its position at the end of Friday's New York session. The Swiss National Bank's 1.20 floor for EUR/CHF came under no serious pressure. Sterling moved about half a euro cent higher but was unable to make further progress.
The economic data played a peripheral part on Friday and Monday but had little lasting impact, overshadowed as they were by the politics of Euroland. Friday's eurozone retail sales were better than forecast, rising by a monthly 0.3% and down by only -0.2% on the year. US non-farm payrolls rose by 115k, 50k fewer than forecast, but the shortfall was largely offset by a 43k upward revision to the previous month's figure. The Canadian dollar took a knock when the Ivey purchasing managers' index slumped from 65.0 to 52.2.
Yesterday Switzerland reported an incremental fall in unemployment to 3.1% and continued deflation with prices falling by -1.0% in the year to April. German factory orders and Canadian building permits both exceeded expectations with monthly increases of 2.2% and 4.7%. Last night the RICS UK housing price balance fell from -11% to -19% and Australia's trade deficit doubled to -A$1.6bn.
Due for release are German industrial production and Canadian housing starts. Neither of those is likely to be much of a distraction from eurozone politics. Nor will they divert attention from developments at Bankia. The Spanish bank arose from a shotgun marriage 18 months ago between seven regional caja institutions, after the government had relieved them of their most toxic assets. Now it transpires that a significant level of toxicity remains and that the government will have to inject another €10bn of assistance, more than twice the bank's existing €4.9bn capital and its €4.7bn market capitalisation. Investors will watch this process and think of Ireland. It will not make them look with more confidence on the euro.
As for sterling, it has at last achieved the goal for which it has striven since early January, breaking above the high of late June 2010 against the euro. Whilst there are no guarantees in this business, it would be a surprise if sterling/euro were not to advance further.